How PE Firms Can Create More Value with Group Purchasing Organizations
Most private equity spend reduction options involve serious manual sourcing effort. Contracts, vendor negotiations, savings leakage mitigation, tail spend reduction—nothing is “plug and play.” But there is an option that’s as close to plug and play as possible. With a group purchasing organization, you can secure savings upwards of 20% in key purchasing categories without dealing with vendors, contracts, or program monitoring. In this guide, we’ll use our relationship with OMNIA partners to show you how.
What is a group purchasing organization?
A group purchasing organization (GPO) is a company that leverages the combined spend of member businesses to secure discounted pricing with select vendors. This type of arrangement is a leveraged purchasing program (LPP), much like a cross-portfolio contract that consolidates vendors across several portfolio companies.
How your portfolio can benefit from a GPO
Because current economic conditions have slowed or halted many of private equity’s traditional growth levers, firms are increasingly looking at purchasing and supply chain operations as a source of financial value.
The first benefit of GPO engagements then, is obvious: they allow you to secure lower pricing in key sourcing categories without lengthy RFX processes and supplier negotiations. Using their own sourcing experience, GPOs can also help firms identify those categories and opportunities for cost cut outs.
Here are a few other, less obvious benefits that private equity firms can expect to reap from working with a GPO:
- Cost reductions for portfolio companies – Leveraged purchasing isn’t just for the portfolio level. A GPO can help your individual companies slash spending by reducing supplier fragmentation, eliminating purchase price variance (PPV) and improving supply chain reliability.
- Rapid implementation and scalability – GPOs can usually set up initial LPPs in a short amount of time. If you want to use the GPO to tackle spending in other areas of your portfolio, you can begin reaping the benefits quickly.
- Existing relationships – GPOs work with businesses and portfolios in hundreds of industries, meaning there’s likely an existing LPP that your firm can benefit from. If not, the GPO won’t have trouble setting one up at the best possible prices.
- Perpetual improvement – Most firms are interested in one-off cost reductions because they’re fast and low effort. However, GPOs will continue managing the LPP in the background, so you achieve the initial savings and all the ones that come with continuous improvement
- Net new value creation – With regulations, economic headwinds, and interruptions all forcing PE firms to change their approach to growth, GPOs can go beyond simple cost savings and analyze spend to identify opportunities for cost avoidances, ESG compliance, risk mitigation, and supply chain protection to name a few.
The last point may be the most important benefit PE firms can gain by working with a GPO. Current economic headwinds mean that the EBITDA enhancement opportunities firms can control often lie deep within spend data, where portfolio company’s spend structures intersect.
Succeeding with a GPO: Get the right start
GPOs can drive cost reductions at scale that would be difficult for firms to do on their own. But they aren’t psychics. They need a way to analyze and explore your spend before they can do anything that benefits you.
In other words, you need a way to gather all the raw spend data from across your portfolio into one place and consolidate it into legible, actionable, regularly updated insights. Only then will a GPO be able to identify the areas where a scaled LPP will be effective, as well as track group purchasing compliance on an ongoing basis.
SpendHQ makes this data process easy and effective. For over 20 years, we’ve helped PE firms transform raw spend data into comprehensive intel on margin enhancement opportunities. By equipping a GPO with this level of perspective, firms regularly secure cost reductions of 20% or more in key categories. And that doesn’t even take into account all the other ways a PE firm can leverage portfolio-wide spend visibility.
100% visibility, 0% effort
By far the best part of this entire equation is that it requires very little effort from the PE firm. We’ll work with your teams to gather the necessary files. Then we’ll normalize and categorize 97+% of that data into a sourcing taxonomy, handing you the keys to tremendous value creation potential in two months or less.
If you want to learn more about how you can kick off a GPO relationship, using SpendHQ combined with our partner integration with OMNIA partners, click here to schedule a meeting with Matt Angier, our Director of Private Equity Accounts.
